Deconcentration as a Remedy for the Oligopoly Problem : A Comparative Law Perspective

Transcription

1 Deconcentration as a Remedy for the Oligopoly Problem : A Comparative Law Perspective John Kallaugher Visiting Professor of Law University College London Latham & Watkins operates as a limited liability partnership worldwide with an affiliate in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership Copyright 2003 Latham & Watkins. All Rights Reserved.

2 Outline of Presentation The nature of the oligopoly problem in small national markets Competition Law tools available to deal with the oligopoly problem Merger control Enhanced control of cartels Joint dominance Structural intervention The challenges of structural intervention What is the experience in other jurisdictions? Can a competition authority devise an optimal market structure? Is implementation of deconcentration practical? Will deconcentration in downstream national markets simply transfer the monopoly surplus to international suppliers?

3 The Oligopoly Problem in Small National Markets Concentration through natural causes can give rise to consumer harm through coordinated effects Higher prices Reduced consumer choice This problem may be particular concern in small national/regional markets barriers to entry (linguistic, transport costs, first mover advantages) may be prevalent Economies of scale may not be exhausted within a small market Distribution, retail sales., locally traded consumer goods, may all be particularly susceptible to concentration (as well as industries based on local networks e.g., telecoms or transport)

4 Competition Policy Tools for Controlling Oligopoly Merger control Enhanced control of cartels Joint dominance Structural intervention

5 Merger Control and Oligopoly in Small Markets In competition policy as in medicine: prevention is better than cure Biggest development in competition policy worldwide over last thirty years has been introduction of pre-merger competition law review This is clearly most important tool for controlling oligopoly Problems: Not always possible to predict subsequent evolution of market Doesn t deal with pre-existing concentration

6 Cartel Enforcement Strict enforcement of rules limiting cooperation between competitors is alternative for controlling oligopoly This is not limited to price-fixing or market sharing cartels but could also involve forms of cooperation that might be acceptable in other market contexts Standardisation Information exchange including discussions with suppliers/customers / government agencies Industry associations Problem is that where market is concentrated and pricing/output is transparent, collusion is not necessary (and may not matter)

7 Cartel Enforcement II Temptation may be to reduce standard of proof needed to find infringement but this means goal is the remedy not control of the conduct under examination

8 Is Joint Dominance the Answer? Joint dominance as currently understood under Article 82 EC Treaty is not an apt tool for dealing with oligopolies in national markets The case law (e.g. TACA, CEWAL) has treated joint dominance as a sub-set of dominance once dominance is established general rules on abuse are applicable Applying established rules on exclusionary abuse will not deal with oligopoly problem Cost-based pricing rules may reduce price competition Banning rebate schemes may increase transparency Anti-discrimination rules will provide a tool for enforcement of cartel

9 Is Joint Dominance the Answer? Competition authorities may use joint dominance as basis for imposing direct control on unfair pricing or contract terms by oligopolists (with all the associated problems) New rules for joint abuse might provide grounds for intervention to impose specific forms of conduct, e.g.: Requirements for open tenders, controlled bidding (as in case of public authorities) Limited contract duration (in absence of open bids)

10 Deconcentration as a Cure for Oligopoly Given the limits of other tools for dealing with oligopoly, obvious question is why not deal with problem directly? -- If oligopolistic structure is the problem, why not just deal directly with that structure? There may be significant legal/constitutional problems involved in creating direct divestiture powers (e.g., are owners entitled to compensation since they have done nothing wrong?) but Remainder of presentation focuses on competition law issues Experience in other jurisdictions Defining the basis for deconcentration Administering the remedy

11 Deconcentration the Experience of Other Jurisdictions US antitrust law (FTC Act) allows direct intervention to achieve deconcentration US law allows deconcentration as a remedy where a substantive violation is identified (Regulation 1/2003 may allow similar remedy in EC law, but no precedents yet) Substantial experience worldwide with divestiture as a remedy for issues raised in merger assessment

12 The US Deconcentration Experience In the 1970 s the FTC conducted a series of investigations intended to provide the basis for breaking up industries with excessive concentration, e.g., Breakfast foods Cars These investigations ground to a halt by 1981 Partly a changed climate for antitrust enforcement A realisation that the empirical evidence was not there to support inference of competitive effects from market structure Cars is good example increasing role of imports from Japan made breaking up of Detroit big three appear irrelevant

13 Deconcentration as a Remedy There is more positive experience from the US where deconcentration has been invoked as a remedy Some of most significant cases historically have involved deconcentration Tobacco Trust Petroleum Trust International patent pools AT&T In some cases the substantive infringement can be viewed almost as pretext in AT&T defendant settled in consent decree although liability was not clearcut) These cases suggest that deconcentration can work as a device for opening markets These were all cases, however, where real issue was unilateral effects not coordinated effects

14 Divestiture in Merger Cases It is now commonplace for parties seeking approval of a concentration to offer divestiture of assets or business units as a basis for eliminating overlaps that might threaten approval of their merger Current practice often involves policing divestiture process to ensure that divested unit remains viable Can divested entity operate on a stand-alone basis? Does proposed buyer have experience in industry? Can parties choose buyer (subject to approval) or should reviewing authority have initial role? This experience can illuminate potential difficulties of deconcentration remedies

15 Building the Case for Deconcentration The US experience in the 1970 s is a salutory reminder of the biggest problem with deconcentration powers can a competition authority be confident of its ability to create a structure for a market that will enhance consumer welfare on a long-lasting basis? The existing structure may not be as anticompetitive as it appears external competition and partial substitutes may erode market power lack of transparency and strong buyers/sellers may make collusion difficult)

16 Building the Case for Deconcentration II An alternative structure may involve losses in economies of scale/scope that lead to higher costs and ultimately higher prices Deconcentration in local markets may make buyers less effective as purchasers of internationally traded goods benefits of increased competition may be consumers in other countries Deconcentration in local markets may make buyers less effective as purchasers of internationally traded goods benefits of increased competition may be consumers in other countries These problems counsel caution in invoking concentration (and existing coordinated effects) as a basis for competition law intervention

17 Administering Deconcentration The US remedy cases and the more recent experience worldwide with merger control remedies illustrate practical concerns in administering deconcentration Remedies work where Upstream/downstream operations are separated Existing business units with autonomous management are demerged (usually on geographic or product lines) Assets (patents, individual stores) are sold to parties either already active in the market or active in similar product markets in different geographic markets

18 Administering Deconcentration II Where these factors are absent, effective deconcentration will be difficult to achieve Deconcentration in retail (e.g., supermarkets) or distribution may require sale of locally owned assets to foreign trade buyers Could the imposition of this remedy threaten political legitimacy of competition law policy?

19 Conclusion The significance of the oligopoly problem in small national markets is understood -- in many cases it is hard to justify intervention in cases of single firm dominance or vertical restraints when the overall market structure is hardly conducive to competition Deconcentration cannot be rejected a priori as a tool for competition policy in this context The comparative law analysis suggests, however, that extreme caution is required in asserting and applying this theory